October 31, 2015

If only we had truly disconnected silos the current crisis would not have happened

Sir, Gillian Tett writes: “Eight long years ago the top managers of western banks learnt the hard way just how damaging fragmentation can be; most notably, banks such as UBS suffered big losses in the financial crisis because they were divided into so many silos that it was impossible for top managers to get an overview of risks.” “Some new hires for a more connected Deutsche Bank”, October 30.

I am not specifically referring to Deutsche Bank but “No! Dear Ms. Tett No!”. The silos were not fragmented… they were very connected, by means of bank regulations, specifically by means of the portfolio invariant credit risk only based capital requirements for banks. Had the silos really been disconnected, we would not have had the systemic crisis, “eight long years ago”.

And that’s is why in 1999 I wrote in an Op-Ed “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

And that is why, in 2003 as an Executive Director of the World Bank, I formally stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

Sir, the problem with Gillian Tett, and many others, is that they are captured in their own non-fragmented silo… and of course, so am I too... only that my silo is a bit wider J

@PerKurowski ©